ARE YOU CONCERNED ABOUT CAPITAL GAINS TAXES?

Section 1031 of the Internal Revenue Code allows for a "like-kind" exchange of property to defer paying capital gains tax on real estate transactions.

The concept of a 1031 Exchange is simple. For example, you wish to sell your real estate and acquire new real estate. With a 1031 Exchange, you relinquish your property to a Qualified Intermediary (QI). Within 45 days, you identify in writing a replacement property. The QI reinvests the proceeds from the sale of your relinquished property to purchase the replacement property within 180 days. 

Why use a 1031 Exchange?​The primary motivation for an investor to utilize a 1031 Exchange is to defer 15-25% of capital gains tax, 25% of the federal tax rate on the recapture of depreciation, and a percentage of state tax. 

• ​Delayed - When the relinquished property is transferred to a Qualified Intermediary (QI), then the replacement property is acquired through the QI; this is the most common type of exchange. 

• Simultaneous - When ownership of both relinquished and replacement properties is transferred concurrently between the same parties, this type of exchange is rare. 

• Reverse - When the replacement property is acquired prior to the relinquished property being sold, this type of exchange requires an Exchange Accommodation Titleholder (EAT) who acquires and holds the replacement property until the relinquished property is sold.  

• Properties must be "held for productive use", which means all property involved must be used in a trade, business, or held for investment. 

• Properties must be "like-kind", such as domestic real property.

• The replacement property must be identified in writing within 45 days following the sale of the relinquished property, and the replacement property must be acquired within 180 days of the sale.

• There are two rules for identifying potential replacement property:

  • The Three Property Rule, where investors are allowed to identify 3​ properties of any price OR

  • The 200% Rule, where as many replacement properties as desired can be identified as long as their combined value does not exceed 200% of the fair market value of the relinquished property.

• Generally, the purchase price of the replacement property must be equal to or greater than the price of the property sold, or capital gains tax will be due on the difference.

• Generally, the proceeds from the sale must be used to buy the replacement property or a portion of capital gains tax is due.